iQiyi (NASDAQ: IQ) and Huya (NYSE: HUYA) are two of China’s best-known video platforms. iQiyi is a premium platform for TV shows and movies, and Huya is a top platform for streaming video games.
The two companies are also subsidiaries of much larger companies. iQiyi is owned by Baidu (NASDAQ: BIDU), which still retains control of the company after sealing it in an IPO in 2018. Huya is owned by Tencent (OTC: TCEHY), who bought JOYEof (NASDAQ: YY) stake in the company earlier this year. Tencent also owns a stake in Huya’s main rival, Douyu (NASDAQ: DOYU), and is currently in the process of merging the two companies under the Huya banner.
IQiyi’s stock rose about 25% above its IPO price. But Huya, which went public just two months after iQiyi, is trading nearly 75% above its IPO price. Let’s see why Huya outperformed iQiyi and whether or not this trend will continue in the future.
How do iQiyi and Huya make money?
iQiyi operates a freemium platform. Free users can watch a limited library of ad-supported videos, while paid subscribers get ad-free videos and additional content. In the last quarter, iQiyi made 56% of its revenue from paid subscriptions, 25% from ads, and the rest from other companies – including licensing fees for content from other streaming platforms.
Huya also operates a freemium platform. It sells ads on its platform, but generates most of its revenue from virtual gifts that viewers can purchase for their favorite broadcasters. In the last quarter, Huya generated 94% of its revenue from its live streaming business and the remaining 6% from online ads.
Which business is growing the fastest?
Huya’s revenue has grown at a much faster rate than iQiyi’s over the past year, but its growth has slowed:
Revenue growth (year-on-year)
The total number of iQiyi subscribers fell 1% year-over-year to 104.8 million in the last quarter. The company blamed the decline on a shortage of new content, in part because of the COVID-19 crisis, as well as users spending more time on short video apps like ByteDance’s Douyin and Holiday Dancing. been shorter this year.
CEO Yu Gong predicted that the slowdown would be “temporary”, but the pressure from its two main rivals, Tencent Video and Ali Babaof (NYSE: BABA) Youku Tudou, could continue to slow its growth in paying members.
Huya’s monthly active users (MAU) grew 18% year-on-year to 172.9 million in the last quarter. Of that total, its mobile MAUs grew 16% to 74.2 million, and its total number of paid users increased 13% to 5.3 million.
CEO Rongjie Dong attributed the growth to an increase in esports tournaments throughout the shorter summer and his closer ties to Tencent, the world’s largest video game publisher. If Huya closes its planned merger with Douyu next year, its MAU could more than double to nearly 370 million, with more than 13 million paying users.
Profitability and evaluations
iQiyi is not profitable, but its net losses have declined year over year for two consecutive quarters. Huya is resolutely profitable and its net profit more than doubled year over year in the last quarter. On an adjusted basis, Huya’s net profit increased by 75%.
It is difficult for iQiyi to break even for two reasons. First, it is very expensive to license content or create new shows and movies. Second, intense competition from Tencent Video, Youku Tudou and other video platforms ultimately limits its ability to raise prices.
Huya generates higher profits as it shares a near-duopoly with Douyu, is supported by Tencent’s huge video game business, and generates most of its revenue from higher margin virtual gifts instead of digital ads. at low margin.
Analysts expect iQiyi’s revenue to grow 10% this year and 13% next year, with smaller losses over the next two years. Based on these estimates, iQiyi is trading at three times next year’s sales.
Wall Street expects Huya’s revenue and profits to increase 40% and 74% respectively this year. Next year, analysts expect its revenue and profits to grow 23% and 36% respectively. Based on these estimates, Huya looks incredibly cheap with 19x forecast earnings and only twice next year’s sales.
These forecasts do not take into account Huya’s potential merger with Douyu, which could easily double its annual turnover. But its valuation is expected to remain roughly the same after the full-market merger, as it will grant current shareholders of Huya and Douyu equal shares in the new company.
The obvious winner: Huya
It’s not really a contest between iQiyi and Huya. Huya is generating stronger user, revenue and profit growth, and it will dominate the booming Chinese esports market after its merger with Douyu. It is also trading at valuations below iQiyi.
iQiyi isn’t going away anytime soon, but its subscribers are unprofitable and bleeding. Until these metrics start moving in the right direction again, streaming video playback will remain much lower than Huya.